Urban Outfitters’ Profits Stumble But Online Business Keeps Hope Afloat

-17.75%
Downside
42.80
Market
35.20
Trefis
URBN: Urban Outfitters logo
URBN
Urban Outfitters

Urban Outfitters‘ (NASDAQ:URBN) shares fell by almost 5% after it reported 33% decline in its Q3 fiscal 2015 profits and missed street estimates. The retailer reported a profit of $0.35 per share, which was significantly below analysts’ estimates of $0.41 per share. [1] The company’s overall comparable sales including direct-to-consumer revenues declined 1% as 15% growth at Free People and 2% rise at Anthropologie was offset by 7% decline in the namesake brand’s comparable sales. The decline in comparable sales was driven by fewer transactions and a fall in units per transaction. [2] However, Urban Outfitters’ revenues increased by 5.2% to $814.5 million, marginally ahead of the market consensus of $813 million. The main factor responsible for the growth in net sales was the addition of $34 million in non-comparable revenues through 14 new outlets, and 26% rise in wholesale revenues. The retailer’s wholesale business flourished in domestic as well as international markets, backed by strong customer response to Free People at department and specialty stores. [2]

The decrease in the company’s comparable sales isn’t surprising, as it had warned about this negative trend in October. Urban Outfitters has been offering heavy discounts on its merchandise in the wake of fierce competition in the market and a consistent decline in the foot traffic. Moreover, its mainline brand Urban Outfitters has had its own problems with merchandise imbalance and off-pitch fashion calls. Together, these factors weighed on the company’s growth in the third quarter of fiscal 2015. Also, We believe that warmer-than-usual weather in October, that encouraged buyers to delay their winter shopping, might have had a negative impact on the retailer’s sales.

Our price estimate for Urban Outfitters at $42.5, implies a premium of less than 40% to the current market price.

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See our complete analysis for Urban Outfitters

Profits Fall Due to Low Gross Margins & Higher Expenses

The substantial fall in Urban Outfitters’ overall profits can be attributed to the decline in gross margins,an  increase in SG&A expenses and higher taxes. During the quarter, the retailer ushered heavy markdowns to compensate for low store traffic and continued weakness in namesake brands, which impacted its gross margins. Overall gross profits fell 3% to $284 million, and gross profit rate shrunk 295 basis points to 34.8% from 37.8% in the same quarter last year. [2] SG&A expenses for Urban Outfitters’ increased 11% during the quarter, and SG&A rate deleveraged by 128 basis points. Higher expenses in marketing and technology for bolstering the web platform was the main reason responsible for the rise in overhead costs. Moreover, the company’s tax rate rose to 37.8% from 33.3% in the year ago period mainly due to state tax adjustments. Overall, these factors dragged Urban Outfitters’ net income down to $47 million from $70 million in the same quarter last year.

However, Online Growth Looked Good

Although Urban Outfitters was unable to register positive growth during the quarter, direct-to-consumer business continued to outperform. Growth across all the brands was positive driven by an increase in order value and web traffic. Overall, web sales increased in double digits driven by a high proportion of full-price sell throughs across the board. Interestingly, the level of promotional activities on Urban Outfitters’ websites was lower than it was in the same quarter last year. During Q3, the company witnessed a continued shift in website visits from desktop to mobile, as web sessions increased by a staggering 38%. Even though conversion rate over mobile is lower as compared to desktops, Urban Outfitters’ overall conversion rate ticked up a little. [2] With the ongoing industry-wide shift from store to web shopping and its continual online growth, the retailer should be encouraged to accelerate the roll-out of its omni-channel strategies. Urban Outfitters has covered significant ground on this front in the past, but there still exists a huge scope for improvement.

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Notes:
  1. Urban Outfitters’ Profit Falls 33% on Weaker Margins, The Wall Street Journal, Nov 17 2014 []
  2. Urban Outfitters’ Q3 fiscal 2015 earnings transcript, Nov 17 2014 [] [] [] []